Credit Downgrades and Operational Due Diligence
Last week Moody’s Investors Service have given credit downgrades to Credit Suisse Group AG
(CSGN), Morgan Stanley (MS) and 13 other banks, highlighting the risk in the financial system and
the need for regulators to quickly adopt a swaps-clearing rule, according to a coalition of proprietary
traders and hedge funds. According to Moody’s, even though these banks had moved to strengthen
their operations, there remained structural weaknesses within their core trading businesses, leading
to downgrades that may prove to have lasting effects on the banking industry.
While the rating service downgrades may seem to reside squarely in the world of investment due
diligence, investor’s should be conscious of the operational ramifications such downgrades may
have vis-a-vis their hedge funds. Some key operational risk points related to the downgrades include:


Investor’s should understand any counter-party risks exposures their hedge funds may have
to banks. Downgrades can affect balance sheets and could have a disruptive effect on the
banks which could affect hedge funds and cause losses for investors.



Many investors claim that the Moody’s downgrade of bank is too late. To stay ahead of the
curve and not simply be reliant on credit rating agencies investor’s need to perform their own
due diligence



Many investors also believe that the credit ratings predicted downgrades were already
anticipated by markets and built into the current price levels of the securities

In general, ratings can be misleading. This is especially true in the world of operational due diligence.
Check out these helpful links for some related info on this topic of discussion:
http://www.forbes.com/2009/06/18/obama-regulation-financial-markets-economy-banking.html
http://corgentum.com/research/whats-wrong-with-hedge-fund-operational-risk-ratings-andcertifications.html
Originally posted on the Corgentum Consulting blog at www.Corgentum.com/blog
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